I am a CPA in Texas with an MBA from the University of Chicago. I have seen a lot and made many mistakes. Hopefully by now I will have learned something from them. Just as importantly, you may learn something from my mistakes. You can e-mail me by clicking on my "View my complete profile".

Monday, August 11, 2008

Temporary Fed Programs?

"A year after the credit markets seized up, the [Fed] is still struggling with the crisis and expanding key lending programs that were designed as temporary measures to nurse the financial system bank to health. ... Troubles in the financial world continue to take the Fed deeper into new territory in its effort to prevent a larger credit crunch. ... For the past yer, Fed officials have sought to separate their policy actions directed toward financial stability--emergency lending to financial firms, for instance--with their monetary-policy role of guiding the economy by setting interest rates. ... The central bank altered or expanded several programs to address the apparent needs of financial institutions and prevent further stress on financial markets. ... In addition, the Fed launched a new program to auction options of up to $50 billion under ... the term securities lending facility. ... The Fed carried out a long-sought extension of its auctioned loans for commercial banks. Those will now be available for 84 days in addition to the 28-day loans under the term auction facility", my emphasis, Sudeep Reddy at the WSJ, 31 July 2008.

You should realize the "emergency" will last as long as the banks tell Helicopter Ben (HB) it should. Temporary? Hahahaha the Mogambu Guru would say. The Fed's attempt to separate "financial stability" from "monetary policy" actions is as absurd as its attempts in the 1960s to separate foreign exchange rates from domestic interest rates. Does anyone remember "Operation Twist"? I do. In 1962 the Treasury got the idea that investment was controlled by long-term interest rates and foreign exchange by short-term. So, if we "twist" the yield curve, we can increase investment and shore up the dollar at the same time. All we need do is drive up short and down long rates. "Operation Twist" was a failure. Hey HB, ever hear of "Uncle" Miltie Friedman? You might learn something from his writings.